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Continued from page 2

Finally, in 2003, Bush announced that the marginal rate of the income tax would be taken down immediately and somewhat substantially, to 35%. The Fed pivoted to raise rates, giving us an approximation of the Reagan-Volcker policy mix of the 1980s of real tax cuts and tight-ish money.

But for several years, too much money had been in the system, and it proceeded to migrate to monetary policy hedges, above all oil and land, the latter especially desirable because housing debt was fulsomely guaranteed by a Fannie Mae and Freddie Mac recently by souped up by lifers in Congress. At any rate, Bush contradicted the Fed’s attempt to tighten by having his Treasury float the dollar downward in the interest of beefing up American exports. Complementing this destructive policy was a new lease on life for quotas and tariffs, such as in the steel industry.

As goes alternative scenarios, it is perfectly conceivable that had Bush cut taxes the right way – at the margin, immediately, and permanently, in 2001 – the Fed would have never panicked into taking rates so basely low for so long. The good tax cut would have been sufficient to ward off a recession in the context of normal interest rates, even given 9/11. There would have been no housing and commodities bubble, because rates would never have been so close to zero as to invite these things. And the quicker boom would have made unnecessary the desperate dollar-devaluation ploy that became a Bush administration hallmark.

The primary question we must ask about the 2000s is not what caused the crisis as the decade came to a close, but why was growth so subpar the whole time? Ultimately financial crises reflect the declining potential of the real economy to deliver. The Bush presidency was perfectly set up after the 2000 election to let the real economy run, but what we got was cold feet on taxes, Hail Marys from the Fed, a bias toward spending, and lack of support for the dollar. By rights, today we should not be mired in economic malaise; rather, we should be enjoying a fourth decade of prosperity on the heels of the roaring 1980s, 1990s, and 2000s.